Insurance: Increasing accessibility through microinsurance

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on February 3, 2020 - February 09, 2020.

Microinsurance products will continue to grow in the near future as people become more aware, are better educated and tech-savvy, and understand the importance of financial protection for themselves and their loved ones. - Loh

Insurers need to redefine their value propositions so that the working population stops regarding their products as expensive and “nice to have” rather than necessary protection.

Life Insurance Association of Malaysia (LIAM) president Loh Guat Lan suggests that insurers repackage their offerings in terms of financial wellness, rather than just, say, life insurance. To remain relevant, life insurance products need to be dramatically altered so that consumers understand, value and want them, she adds.

“The way young adults manage their finances today is very different from the way they did 40 years ago. During my grandfather’s or even father’s generation, when they wanted to buy a car, they would not think of taking a bank loan to make the purchase. Rather, they would save until they could afford the car they wanted. That was why insurance was not as important to them,” says Loh, who is CEO of Hong Leong Assurance Bhd.

However, the current generation is different, she points out. For them, experience and lifestyle are very important. So, they are willing to spend money on this whether they have enough or not. “That is why most people make at least two or three overseas trips a year nowadays,” she says.

“They do not have enough left over to manage financial shocks. So, to ensure that their lifestyles are not terribly disrupted or to ensure that their family can continue living with dignity, they will need to rely on insurance and financial planning.”

This is where insurers can come in. Loh suggests that they change their approach and improve their offerings through microinsurance — coming up with life coverage with bite-sized premiums. Small-ticket insurance coverage, also known as sachet or bite-size insurance, are non-comprehensive plans that focus on specific needs and come with low premiums and lower cover. Such policies help to boost insurance penetration and, in turn, reduce inequality, she says.

“We have to change the mindset that insurance is expensive. Today, if you want insurance only for critical illnesses, it can be provided. You can recover from critical illness and get on with your life, but you will need funds to support your treatment cost. That is where bite-sized coverage helps.

“The effects are more pronounced among lower-income groups and micro- and small enterprises, especially when they are disproportionately impacted events such as the death or incapacitation of a breadwinner, or business disruptions.”

The growth of life insurance and takaful in the country has been sluggish in the last few years as penetration, in terms of total premiums to Malaysia’s gross domestic product, remained low at 4.8%, according to Bank Negara Malaysia.

The penetration rate of life insurance and takaful has been hovering at about 54% in the last five years. If you eliminate multiple ownership of policies, the figure drops to 41%. Of the figure, only 4% of households in the bottom 40% (B40) of the population have some form of life coverage.

Even then, the 4% that have some form of protection are not sufficiently covered, says Loh. “The average sum assured in Malaysia is about RM50,000, which is grossly inadequate. Based on a study undertaken LIAM and Universiti Kebangsaan Malaysia in 2013, there was a huge protection gap for families with life insurance policies.

“On average, the gap ranged between RM100,000 and RM150,000. A family of five will need at least RM553,000 to survive for the next five years if the breadwinner is incapacitated or has passed away.”

This is an area that LIAM has been ardently working on to improve penetration. In collaboration with Bank Negara, the Malaysian Takaful Association and Persatuan Insurans Am Malaysia, LIAM initiated the Perlindungan Tenang scheme, through which insurers are encouraged to offer affordable protection plans targeted at the under-protected B40 segment.

“Of the 50.4% of 16 million working adults aged between 20 and 59, some 7.8 million are uninsured. And of that number, 3.9 million are in the B40 group,” says Loh.

“The B40 segment is highly vulnerable to financial shocks. But seeing as their income is spent on basic needs such as food and shelter, insurance is not seen as a priority. There is not a compelling motivation to get insurance protection and most only think about it after a tragedy strikes.”

Currently, six life insurance companies are offering plans under the Perlindungan Tenang scheme, with premiums from as low as RM3 a day and sum assured of between RM10,000 and RM30,000.

Loh attributes the boom in microinsurance products to the progress in the insurance technology (insurtech) space, which has paved the way for insurers to lower their cost of capital to help fulfil the nation’s aspiration of reducing the protection gap. “It is because of insurtech that we have bite-sized products, which are very affordable. Some people may find these technologies disruptive, but I believe we have to be able to disrupt our own business so we can perform better. It is beneficial to the public and even more so to the market that was previously impenetrable,” she says.

These developments also come at an opportune time as medical expenditure in Malaysia is among the highest in the region, says Loh. “About 43% of medical expenditure in Malaysia is covered government hospitals, which translates to about 10% of the country’s GDP, while 38% is out-of-pocket expenditure and 7% is covered insurance companies.

“If healthcare cost is no longer sustainable, the increase in premiums is inevitable. This may lead to lapses in the premiums of medical policies and result in more people relying on medical treatment at government hospitals.”

That is why having sachet insurance for medical needs could lead to sustainable healthcare costs in the long term, she says. “Microinsurance products will continue to grow in the near future as people become more aware, are better educated and tech-savvy, and understand the importance of financial protection for themselves and their loved ones.

“There is still a lot of room in the local insurance industry to expand. As an insurer, we are coming up with more sophisticated products to meet customer needs and we are confident these will help improve the penetration rate over time.”

Innovation is not limited to products but also includes intermediaries, that is, insurance agents. “Agents are still the leading distribution channel followed bancassurance, direct marketing and financial advisers. There are about 75,700 life insurance agents and 20,000 bank employees in the industry,” says Loh.

“To enhance their professionalism, we are working with the Malaysian Insurance Institute, Malaysian Financial Planning Council and National Association of Malaysian Life Insurance and Family Takaful Advisors to review the existing development and upskilling programmes.”

One of the initiatives is the balanced scorecard for intermediaries, which sets out a basic structure for insurance companies to remunerate their agents, so as to achieve outcomes that will benefit consumers.

“We need to ensure that the agents are able to deliver satisfactory customer service. This is one of the main objectives of this association,” says Loh.

“We need a quality salesforce to do the job. That is why we are working with all the industry associations to come up with new and relevant skills training programmes that we can enhance and strengthen.”

LIAM has come up with a three-year plan focusing on advocacy, public education and awareness, industry support and industry development. “We are making sure that the ecosystem is there for them to transform. We will also continue to support the industry conducting studies on how to penetrate the B40 and M40 segments better,” she says.

The challenge is in making insurance a profession of choice as only 25% of the 75,700 agents are working in the field full-time. “That is why the first step for us is to impose a minimum productivity measurement to encourage the productivity of the agency force. To entice them, we need to make sure the agents are able earn more. And to earn more, they need to offer quality service and be incentivised to do it. If they do well, then they will not need a second or third job,” says Loh.